Netflix Burns Shorts as ‘Extreme’ Downtrend Ebbs

Investors who have bet against Netflix Inc. in recent months may now be licking their wounds.

Shares of the streaming giant are up 50 percent from their May low, buoyed by the promise of new features to reignite growth, better-than-expected quarterly results and the runaway success of the latest installment of the sci-fi thriller Stranger. Things.

That’s hurting short sellers, who borrow shares and sell them, hoping to buy them back at a lower price to profit from the difference. Since mid-May, they have seen $996 million in market value losses, according to S3 Partners.

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At its lowest point in May, Netflix fell 72 percent for the year as the company faced mounting competition, customers whose finances are strained by rising inflation, the possibility of a global recession and the end of the streaming boom fueled by the pandemic.

The downtrend was extreme, said Neil Campling, head of technology, media and telecommunications research at Mirabaud Securities. The stock reached extreme oversold levels and traded at a massive discount to trend valuation, peers and history.

To be sure, with shares still down 59 percent in 2022, shorts that have been bearish since the start of 2022 still have $2.69 billion in market gains, according to Ihor Dusaniwsky, managing director of predictive analytics. on S3 partners.

The recent rally in Netflix shares reflects optimism about the start of a highly anticipated version of the streaming service that will include advertising, a crackdown on password sharing and better-than-feared second-quarter subscriber loss. The company also forecast growth in its subscriber base after two quarters of contraction.

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The bears who gave up on their bets may have added fuel to the rally. In the past month, short sellers have bought back about 2.4 million shares worth $599 million, according to S3 Partners. That’s an 18 percent decline in the total number of shares shorted as Netflix rallied.

Netflix shorts have been actively cutting their short exposure after the most recent earnings call, hoping that the worst is over and this quarter reflects better earnings and/or user growth, Dusaniwsky said.

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Netflix shares remain cheaper than usual after its rally. They are priced at less than 23 times projected earnings for the next 12 months, well below the 10-year average of 80 times. The Nasdaq 100 is at 24, while the S&P 500 price-earnings ratio is at 18.

Others are bracing for some volatility, as concerns about competition and rising costs won’t go away any time soon. This stock may do very well for the next 12 to 24 months, but there will probably be a better entry point in the fall, said Matt Maley, chief market strategist at Miller Tabak + Co.

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